SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
Commission File Number 0-19579
INTERACTIVE NETWORK, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3025019
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation and organization)
180 SECOND STREET, SUITE B, LOS ALTOS, CALIFORNIA 94022
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(Address of principal executive offices, including zip code)
(650) 947-3345
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(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE PER SHARE
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequently to the distribution of securities under a plan
confirmed by a Court. Yes X No __
The aggregate market value of the voting stock held by non-affiliates
(non-officers, directors and 10% shareholders and excluding the shares held by
the Voting Trust (see Item 12)) of the Registrant, based on the closing price of
the common stock on November __, 2001, as reported on the OTC Bulletin Board for
the last trading day prior to that date, was approximately $___________. Shares
of common stock held by each executive officer and director and holder of 5% or
more of the outstanding common stock have been excluded from this computation in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of October 15, 2001 the Registrant had outstanding 43,019,277 shares
of Common Stock.
Documents Incorporated By Reference
None
INDEX
INTERACTIVE NETWORK, INC.
Page No.
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PART II
Item 6. SELECTED FINANCIAL DATA.........................................4
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................5
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................11
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.....................................................43
SIGNATURES......................................................47
CAUTIONS ABOUT FORWARD-LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K INCLUDES FORWARD-LOOKING STATEMENTS
ABOUT FUTURE FINANCIAL RESULTS, FUTURE BUSINESS CHANGES AND OTHER EVENTS THAT
HAVE NOT YET OCCURRED. FOR EXAMPLE, STATEMENTS LIKE WE "EXPECT," WE "BELIEVE,"
WE "INTEND" OR WE "ANTICIPATE" ARE FORWARD-LOOKING STATEMENTS. INVESTORS SHOULD
BE AWARE THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM OUR EXPECTATIONS BECAUSE
OF RISKS AND UNCERTAINTIES ABOUT THE FUTURE. IN ADDITION, WE WILL NOT
NECESSARILY UPDATE THE INFORMATION IN THIS ANNUAL REPORT ON FORM 10-K IF ANY
FORWARD-LOOKING STATEMENT LATER TURNS OUT TO BE INACCURATE. DETAILS ABOUT RISKS
AFFECTING VARIOUS ASPECTS OF OUR BUSINESS ARE INCLUDED THROUGHOUT THIS ANNUAL
REPORT ON FORM 10-K, INCLUDING THOSE DESCRIBED BELOW IN "FACTORS AFFECTING
FUTURE OPERATING RESULTS" AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K.
THE TERMS "WE," "OUR," "US," "THE COMPANY" AND "INTERACTIVE" AS USED IN
THIS ANNUAL REPORT ON FORM 10-K REFER TO "INTERACTIVE NETWORK, INC." IN
ADDITION, THIS ANNUAL REPORT ON FORM 10-K INCLUDES OUR TRADEMARKS AND REGISTERED
TRADEMARKS. PRODUCTS OR SERVICE NAMES OF OTHER COMPANIES MENTIONED IN THIS
ANNUAL REPORT ON FORM 10-K MAY BE TRADEMARKS OR REGISTERED TRADEMARKS OF THEIR
RESPECTIVE OWNERS.
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A to the Annual Report on Form 10-K
for the year ended December 31, 2000 is being filed to amend Item 6, Item 7,
Item 8 and Item 14 to read as follows. No other changes are being made to the
Form 10-K. All references to the Company refer to Interactive Network, Inc.,
except that in the Independent Auditors' Report, the Financial Statements, and
the Notes to the Financial Statements beginning on page 33 of this Report
references to the Company refer to TWIN Entertainment, Inc.
PART II
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data presented
below are derived from our consolidated financial statements. The consolidated
financial statements for the fiscal years ended December 31, 2000 and 1999 have
been audited by Marc Lumer & Company, and for the fiscal years ended 1998, 1997
and 1996 have been audited by KPMG LLP. The selected consolidated financial data
set forth below is qualified in its entirety by, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
YEARS ENDED DECEMBER 31
-----------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998 1997 1996
(AUDITED) (AUDITED) (AUDITED) (AUDITED) (AUDITED)
Total Revenue...................................... $250,000 $0 $0 $0 $0
Net income (loss).................................. $(5,602) $8,147 $(1,488) $(5,938) $(4,552)
Net income (loss) per share (basic and diluted).... $(0.14) $0.23 $(0.05) $(0.19) $(0.15)
Shares used in computing net income (loss)
per share (basic and diluted)...................... 40,048 35,516 30,840 30,840 30,840
Total Assets....................................... $6,595 $7,658 $379 $84 $174
Long-term obligations.............................. $685 $917 $0 $0 $33,817
Liabilities subject to Compromise.................. $5,503 $5,016 $46,296 $0 $0
Cash dividends declared per common share........... $0 $0 $0 $0 $0
4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Interactive Network was originally founded to provide interactive
television services, which we began providing in 1991. We incurred significant
expenses in developing, testing and marketing our services, and were forced to
curtail our operations by August 1995, due to lack of ongoing financing. While
in operation, we acquired investors such as TCI Cable (now a part of AT&T), NBC,
Gannett, Motorola, Sprint, and AC Nielson.
Today, we own certain intellectual property assets related to the
interactive television market and other interactive technology. Our management
is confident in its strategy to deliver shareholder value by marketing our
intellectual property and by working to enhance and develop our patent
portfolio. We continue to concentrate on exploiting our patent portfolio in a
cost-effective way through licenses, joint ventures, strategic alliances, or
other methods that do not involve large overhead demands. In the event that the
merger with TWIN Entertainment, Inc. is consummated, as discussed below, we
believe that the combined company will move from exploiting our patent portfolio
through broad licensing, joint ventures and strategic alliances and will instead
engage in restrictive licensing of Interactive Network's intellectual property
and focus on developing and licensing products and services that utilize
Interactive Network's patents.
We have an advisory panel of consultants and have re-employed our
former Chief Scientist, Dr. Robert Brown to provide the technical and management
expertise to assist in the fulfillment of our goals. Further, our management is
planning to hire additional personnel to meet our anticipated future needs. Our
bankruptcy reorganization plan was approved by the Bankruptcy Court in 1999 and
we continue to expend resources in litigating disputed claims. In addition, we
expend significant resources in the maintenance and enforcement of our
intellectual property rights. Our management believes that our intellectual
property assets put our company in a position to be a part of the interactive
content and interactive services businesses currently being developed.
On January 31, 2000, we consummated the formation of a joint venture
company, TWIN Entertainment, which is co-owned and co-managed by us and Two Way
TV under the terms of a Joint Venture and Stock Purchase Agreement dated as of
December 6, 1999. This agreement was filed with the SEC on February 11, 2000, as
Exhibit 2.1 to a Report on Form 8-K and is incorporated herein by reference.
Each of us and Two Way TV invested $500,000 in TWIN Entertainment. TWIN
Entertainment currently expects to develop, market and supply digital (as well
as analog) interactive and related services, products and technology in the
United States and Canada. We have licensed TWIN Entertainment the non-exclusive
use of our patents and other intellectual property for the United States and
Canada. Two Way TV also licensed to TWIN Entertainment certain intellectual
property rights and technology, including then-existing and future content,
software, know-how and other technological materials and information, on a
non-exclusive basis.
Additionally, as part of the agreements with Two Way TV to create TWIN
Entertainment, we settled all outstanding claims with Two Way TV and entered
into a separate worldwide license agreement that exclusively licenses our
intellectual property in countries other than the United States and Canada to
Two Way TV in exchange for a royalty payment of a certain percentage of Two Way
TV's world wide sales. Under the terms of the agreement, Two Way TV will pay us
a royalty of 3% of worldwide Gross Profits (as defined in the Termination and
License Agreement dated as of January 31, 2000, which was filed with the SEC on
February 11, 2000 as Exhibit 2.5 to a Report on Form 8-K and which is
incorporated herein by reference), with a minimum annual royalty of no less than
$250,000 by January 31, 2001, with the minimum royalty payment increasing by at
least eight percent (8%) each year thereafter. In March 2001, Two Way TV paid us
a royalty of $250,000 for the year ending December 31, 2000.
5
During the year ended December 31, 2000, we made additional investments
in TWIN Entertainment in the form of a $750,000 loan in September and a $250,000
loan in December, and Two Way TV made similar loans to TWIN Entertainment. Each
of us and Two Way reserves the right to convert the loan amounts to equity in
TWIN Entertainment in the future under terms to be determined and agreed upon at
a later date by us the parties. Although TWIN Entertainment has not generated
revenues to date and no assurance can be made that it will generate revenues or
be profitable in the future, we made a further loan of $250,000 on similar terms
as described above in February 2001 to TWIN Entertainment, and Two Way TV made a
similar loan to TWIN Entertainment.
We understand that TWIN Entertainment's management continues to discuss
with a number of companies carriage and content agreements to deliver and create
interactive entertainment under the licensing it has received from us and Two
Way TV. Although TWIN Entertainment has not to date generated revenues and no
assurance can be given that TWIN Entertainment will be profitable in the future,
it is our belief that if the merger discussed below is successfully consummated,
the combined company will use our intellectual property and Two Way TV's
technology to become an active participant in the interactive television and
broadband market in the U.S. and Canada.
In December 2000, we announced that we were negotiating the terms of a
transaction with Two Way TV under which we would acquire 100% ownership of TWIN
Entertainment. Under the terms of the transaction as currently proposed, Two Way
TV will exchange its interest in TWIN Entertainment for a substantial stake in
Interactive Network, making Two Way TV our largest shareholder. TWIN
Entertainment will merge with us, forming a single company. Final terms of the
transaction have not been agreed upon, however, and the completion of any
transaction is subject to many conditions, including the negotiation and
execution of definitive legal agreements, due diligence by us and Two Way TV,
approval by both our board and Two Way TV's board, approval by TWIN
Entertainment's shareholders, approval by our shareholders and any required
regulatory review. Thus, while we believe that the transaction will be
completed, it remains possible that the acquisition will not take place or that
the terms of any actual transaction as consummated will be significantly
different from those currently proposed.
OTHER CONTINGENCIES AND COMMITMENTS
1. CLAIMS IN CHAPTER 11 PROCEEDINGS WHICH WE ARE CONTESTING.
(a) DAVID LOCKTON. David Lockton, a shareholder and our former CEO,
filed a complaint in our bankruptcy case seeking specific performance
of his promissory note for $2.0 million, his alleged stock option
rights for 2,225,000 shares of our common stock and back pay on his
employment agreement and damages of $17 million. Trial of Mr. Lockton's
claims took place on May 8-11 and May 30-31, 2000. A memorandum
decision was filed by the Bankruptcy Court on September 27, 2000. The
Bankruptcy Court held that Mr. Lockton retained to the right to be paid
$1.85 million under the terms of his promissory note. Under the terms
of the promissory note, payments do not become due and payable until
such time that the Company has generated certain levels of positive
cash flow for two consecutive quarters and any such payments may be
limited or suspended based on the extent of the Company's cash flows.
The Bankruptcy Court also held that Mr. Lockton was entitled to a
judgment allowing Mr. Lockton's claim for $913,810.21 under his
employment agreement and found that Mr. Lockton had the right to
exercise options to purchase 900,000 shares of our common stock at
$0.09 per share. The Court also held that Mr. Lockton was entitled to
postpetition interest on the amount of the judgment at the rate of 10%
per annum simple interest. A judgment was entered on October 30, 2000.
On November 13, 2000, Mr. Lockton filed a Motion to Reconsider.
Subsequently, Mr. Lockton offered to withdraw his motion to reconsider
and to forego any appeal in return for payment of his claim by the
Company and issuance by the Company of the 900,000 shares the
Bankruptcy Court had found were due him. Mr. Lockton also requested
that the shares be registered for redistrubtion. The Company agreed to
Mr. Lockton's proposal. Mr. Lockton withdrew his motion to reconsider
and allowed the time to appeal to expire without filing an appeal. The
Company paid him the amount of his allowed claim plus interest to the
date of payment, less the $81,000 purchase price of the 900,000 shares
(by agreement with Mr. Lockton), and registered and issued to him the
900,000 shares.
6
(b) NATIONAL DATACAST AND OTHER MATERIAL CLAIMS. We filed other claim
objections on June 21, 1999, some of which are still being disputed. We
continue to dispute the claims of National Datacast in our bankruptcy
proceeding. As of November 1, 2000, National Datacast's claim totaled
approximately $4.93 million; as of March 1, 2001, interest had
increased it to about $5.06 million. We have appealed the July 2000
memorandum decision, and filed our opening brief on March 6, 2001. We
have also obtained from the Bankruptcy Court a stay of enforcement of
the judgment by National Datacast pending the appeal. National Datacast
filed a cross appeal against the Company on issues on which the
bankruptcy court found for us involving potential damages in the amount
of approximately $800,000. The stay of enforcement is conditioned on
our funding of the reserve account securing the claims of unpaid or
disputed claims created by our confirmed plan of reorganization at 100%
of the remaining claims and adjusting the reserve account on a monthly
basis thereafter enough to cover remaining claims in light of accruing
interest, where applicable. The Bankruptcy Court entered the stay order
on November 13, 2000. We funded the reserve account within the deadline
set by the stay order, and have continued to keep it funded at 100%.
The approximately $800,000 at issue in National Datacast's cross appeal
was not requested to be covered by the reserve account at the time we
obtained the stay from the Bankruptcy Court and it is not currently
covered.
(c) OTHER CLAIMS AND SETTLED CLAIMS. We previously obtained Bankruptcy
Court approval of our previously disclosed preliminary settlement of
the claims of the Equitable Life Assurance Society ("Equitable"). Under
the settlement, Equitable accepted a total of $840,000 on its scheduled
claims of $1.7 million, to be paid one half upon approval by the
Bankruptcy Court, and one half in equal monthly installments over the
twelve months thereafter, without interest. As of March 1, 2001, we had
paid the first half of the settlement and made eight (8) of the monthly
payments. The balance owed Equitable following the March 1, 2001,
payment was $140,063. As of March 1, 2001, there were four payments
remaining, the money for which is set aside in our reserve account.
We obtained a settlement of a disputed claim by Evans Research
Associates that was approved by the Bankruptcy Court. Under the terms
of the settlement, we paid Evans $12,500, which is approximately 70% of
the total amount that was claimed by Evans.
Fish & Richardson claims approximately $266,700 (with interest) as of
March 1, 2001, for prepetition legal services rendered to Interactive.
We contend that we owe Fish & Richardson substantially less, if
anything at all. We recently filed an objection to Fish & Richardson's
claim. At a status conference on March 30, 2001, the Bankruptcy Court
set trial on this dispute for September 4-5, 2001.
We are continuing our litigation against Networks North, Inc. (formerly
NTN Communications Canada, Inc.) in Canada for that company's alleged
infringement of our patents. As of March 1, 2001, we have incurred
expenses of approximately $103,000 in connection with the pursuit of
this claim.
2. CONTRACTUAL COMMITMENTS. The Bankruptcy Code contemplates that a
debtor in Chapter 11 proceedings may identify executory contracts that it
intends to assume as a part of its plan of reorganization. Executory contracts
that are not expressly assumed are deemed rejected, and the only remedy of the
other party to the contract is to pursue a claim for damages for breach of
contract following confirmation of the Plan of Reorganization. As previously
disclosed in our Annual Report and Proxy Statement for our special meeting on
March 31, 1999, we assumed certain obligations under existing contracts,
including a 1992 Stock Purchase Agreement with Gannett Co., Inc. and a 1992
know-how license agreement with Two Way TV (the latter having been terminated
under our Termination and License Agreement with Two Way TV in January 2000). We
have treated obligations we had to TCI, NBC, Sprint and Motorola as terminated
under the Settlement Agreement. In addition, we did not assume several
contractual arrangements that had not been operative for many years. If at some
future date the other party to one of those arrangements should seek to assert
that the arrangement was still in effect on the date of confirmation of our plan
of reorganization, we will review the matter and take such steps as we consider
appropriate to recognize or disavow the contract in a manner that will be in our
best interest.
7
3. TWO WAY TV JOINT VENTURE. As discussed above, the Company formed a
joint venture with Two Way TV and for $500,000 purchased one half of the capital
stock of TWIN Entertainment, the joint venture company. We currently expect that
TWIN Entertainment will develop, market and supply digital (as well as analog)
interactive and related services, products and technology in the United States
and Canada. As a significant shareholder of TWIN Entertainment, the Company's
revenues are affected by TWIN Entertainment's revenues. To date, TWIN
Entertainment has generated no revenues, and we have no assurance that TWIN
Entertainment will ever generate revenues. Although we have no obligation to
provide further funds to TWIN Entertainment, we made additional investments in
TWIN Entertainment in the form of a $750,000 loan and a $250,000 loan to TWIN
Entertainment, and Two Way TV made similar loans to TWIN Entertainment. Because
we have no assurance that TWIN Entertainment will generate revenues and be
profitable in the future, we wrote our investment in TWIN Entertainment down to
zero. Each of us and Two Way reserves the right to convert the loan amounts to
equity in TWIN Entertainment in the future under terms to be determined and
agreed upon at a later date by us and Two Way as the shareholders of TWIN
Entertainment. We made a further loan of $250,000 on similar terms as described
above in February 2001 to TWIN Entertainment, and Two Way TV made a similar loan
to TWIN Entertainment.
We have licensed TWIN Entertainment the non-exclusive use of our
patents and other intellectual property for the United States and Canada. Two
Way TV also licensed to TWIN Entertainment certain intellectual property rights
and technology, including then-existing and future content, software, know-how
and other technological materials and information, on a non-exclusive basis.
Additionally, as part of the agreements with Two Way TV to create TWIN
Entertainment, we settled all outstanding claims with Two Way TV and entered
into a separate worldwide license agreement that exclusively licenses our
intellectual property in countries other than the United States and Canada to
Two Way TV in exchange for a royalty payment of a certain percentage of Two Way
TV's world wide sales. Under the terms of the agreement, Two Way TV will pay us
a royalty of 3% of worldwide Gross Profits (as defined in the Termination and
License Agreement dated as of January 31, 2000, which was filed with the SEC on
February 11, 2000, as Exhibit 2.5 to a Report on Form 8-K and is incorporated
herein by reference), with a minimum annual royalty of no less than $250,000 by
January 31, 2001, with the minimum royalty payment increasing by at least eight
percent (8%) each year thereafter. In March 2001, Two Way TV paid us a royalty
of $250,000 for the year ending December 31, 2000.
In December 2000, we announced that we were negotiating the terms of a
transaction with Two Way TV under which we would acquire 100% ownership of TWIN
Entertainment. Under the terms of the transaction as currently proposed, Two Way
TV will exchange its interest in TWIN Entertainment for a substantial stake in
Interactive Network, making Two Way TV our largest shareholder. TWIN
Entertainment will merge with us, forming a single company. Final terms of the
transaction have not been agreed upon, however, and the completion of any
transaction is subject to many conditions, including the negotiation and
execution of definitive legal agreements, due diligence by us and Two Way TV,
approval by both our board and Two Way TV's board, approval by TWIN
Entertainment's shareholders, approval by our shareholders and any required
regulatory review. Thus, while we believe that the transaction will be
completed, it remains possible that the acquisition will not take place or that
the terms of the transaction will be significantly different from those
currently proposed.
4. LEGAL EXPENSES. We incurred legal expenses currently reflected on
the balance sheets of $957,775 prior to confirmation of our bankruptcy
reorganization plan on April 22, 1999, which became payable on April 22, 2000,
subject to Bankruptcy Court approval, which our counsel intends to seek. We also
incurred post-confirmation legal expenses, principally in preparing and
litigating objections to claims filed in the bankruptcy proceeding and for
general corporate matters, on which a balance of $684,520 remains unpaid, as of
December 31, 2000. We have entered into an agreement with our counsel for
payment of these expenses on the following terms: the preconfirmation legal fees
currently reflected on the balance sheets as $957,775 is due and payable on
September 30, 2001, with interest accruing from October 15, 2000 at 1% per annum
over Bank of America's prime rate and the $684,520 is payable in equal monthly
installments over two years, commencing October 15, 2001, with interest accruing
from October 15, 2000 at 1% per annum over Bank of America's prime rate. We also
issued to our counsel a warrant exercisable in whole or in part from time to
time for 5 years, to purchase sufficient shares of our common stock to enable
the warrant holder, by tender of the warrant in satisfaction of such
8
indebtedness (and any indebtedness incurred in appealing Bankruptcy Court
awards), to extinguish such indebtedness in full. The warrant exercise price is
$1.23 per share. In addition to the foregoing legal expenses, through December
31, 2000, contingent legal expenses in the amount of approximately $1.1 million
have been incurred by the Company in contesting claims in the Bankruptcy Court,
which we will be obligated to pay only out of savings realized from a successful
reversal or reduction on appeal of awards granted by the Bankruptcy Court with
respect to contested claims, or, if an appeal is not pursued, through
cancellation of the unscheduled contingent legal expenses by exercise of a
warrant containing substantially the same terms as the warrant described above.
LIQUIDITY AND CAPITAL RESOURCES
We consummated a settlement agreement with our secured senior
noteholders and have paid all undisputed claims under our confirmed plan of
reorganization. A substantial portion of the proceeds received from the
noteholders was allocated to pay creditors and a large portion of those funds
were set aside in a reserve account for the payment of creditors whose claims we
are continuing to dispute. As of December 31, 2000, the balance of these
reserved funds was $5.6 million. As of March 1, 2001, the total of all allowed
and disputed prepetition claims either allowed or disputed totaled approximately
$5.6 million. The amount of funds available to us after resolution of contested
claims with creditors will depend on the extent to which we are successful in
substantially reducing, defeating or deferring payment of the claims we are
contesting. In the event we are not successful in defeating, substantially
reducing or deferring payment of these claims by creditors, our working capital
requirements would need to be satisfied in part by external sources of financing
to the extent revenues from exploitation of our patent portfolio are not
sufficient. Certain investors have agreed to allow the Company to use funds
committed in our recently completed financing (see below) by them to supplement
our bankruptcy reserve account to provide for 100% of the remaining claims
covered by this account under our confirmed plan of reorganization as of
November 30, 2000 and to add funds thereafter on a monthly basis to retain the
100% coverage as interest accrues on certain of those claims, as applicable. By
this arrangement, we have obtained an order of the Bankruptcy Court staying the
enforcement of the National Datacast claim. The Bankruptcy Court entered the
stay order on November 13, 2000. The Company funded the reserve account within
the deadline set by the stay order, and has continued to keep it funded at 100%.
The approximately $800,000 at issue in National Datacast's cross appeal was not
requested to be covered by the reserve account at the time we obtained the stay
from the Bankruptcy Court and it is not currently covered. The only remaining
claims, which are secured by the reserve account, are those of National Datacast
(which is on appeal as discussed above), Fish & Richardson (which is subject to
a claim objection proceeding as discussed above) and Equitable (which claim is
being paid on a monthly basis pursuant to a settlement with Equitable, with four
equal installments of about $35,000 remaining as of March 1, 2001). The claims
were secured by a lien on the revenue arising from our intellectual property,
but in accordance with our confirmed plan of reorganization, the lien was
released because the reserve account is funded for 100% of remaining credtitor
claims. Since our last report, we have paid the claims of David B. Lockton and
Evans Research Associates.
Our current business plan continues to be one of exploiting our patent
portfolio through negotiating favorable licensing with those companies actively
involved in, or planning to enter into, the area of interactive advertising
and/or the delivery, or production of interactive entertainment where we believe
a license from the Company will be required to avoid their infringement upon one
or more of the Company's patents. Where we cannot make favorable agreements with
companies whom we believe are infringing upon the Company's intellectual
property, it is management's intention to litigate that infringement to enforce
and to protect our rights. Additionally, we will continue to support TWIN
Entertainment. Although it has no current revenue and no assurance can be given
that it will be profitable in the future, we feel that TWIN Entertainment will
be successful in the future by contracting with content providers to create
interactive programming and with cable and satellite operators to deliver
interactive content to their subscribers. In the event of the successful
completion of the merger with TWIN Entertainment, we believe that the combined
company will move from exploiting our patent portfolio solely through licenses,
joint ventures and strategic alliances and will instead engage in restrictive
licensing of our intellectual property and also develop and license products and
services that utilize our patents.
9
Management intends to continue its patent development program and to
continue to seek out mutually advantageous agreements with other related
companies to form partnerships and alliances which will enhance the value of,
and assist in exploiting, our technology. We continue to pursue our claims for
patent infringement against Networks North, Inc. (formerly NTN Communications
Canada, Inc.) in Canada and intend to litigate these claims to full resolution.
To date, we have incurred expenses of approximately $102,667 in connection with
the pursuit of this claim. As is customary in Canada, we were also required by
the Court to post a bond for $27,160 to cover the defendant's legal costs in the
case of an unfavorable decision against the plaintiff. We currently expect to
incur aggregate additional expenses in excess of $100,000 in connection with the
pursuit of this claim.
Our working capital deficit as of December 31, 2000, was approximately
$500,000, due in part to deferred legal fees owed in September 2001 and accounts
payable and accrued liabilities. Our budget for 2001 contains expenses of
approximately $2.9 million, including repayment of approximately $972,000 of
debt due in 2001 and operational expenses of $1.35 million, which includes the
estimated cost for keeping the bankruptcy reserve account fully funded. We
currently expect our need for working capital for year 2001 to consist largely
of general and administrative expenses, repayment of debt due in 2001, $250,000
paid to TWIN Entertainment in February 2001, and professional fees of
approximately $400,000. We anticipate a total operating budget of approximately
$2.9 million for year 2001. We currently expect revenues in 2001 to be
insufficient to meet budgeted needs for cash and are in negotiations to secure
outside sources of financing. In the event we do not secure adequate financing,
our ability to meet our working capital needs could be seriously impaired.
FINANCING ACTIVITIES. In the fiscal year ended December 31, 2000, we
received $195,500 upon the exercise of stock options.
Between September 13, 2000, and December 31, 2000, we raised $3.1
million through the sale of 2,541,672 units to private investors pursuant to a
Stock Purchase and Investment Agreement dated September 13, 2000. Each unit
consists of one share of our common stock and a five-year warrant to purchase
one share of our common stock at an exercise price of $1.90 per share. Under the
agreement, these investors retain substantial control over the use of proceeds
from their investment. Our $750,000 and $250,000 loans to TWIN Entertainment and
$931,000 set aside for the bankruptcy reserve account in the year ending
December 31, 2000, were paid out of the proceeds from the sale of these units,
and we intend to use the remainder to fund our operations through the second
quarter of 2001. This description is a general summary only and does not
describe all the terms of the investment, which is governed by the agreement. A
copy of the agreement has been filed as Exhibit 10.19 to the Quarterly Report on
Form 10-Q filed with the SEC on November 14, 2000, and is incorporated herein by
reference.
Pursuant to an agreement with one of our advisory board members, we
received $250,000 in exchange for shares of our common stock.
We recognize that we will require additional financing to meet our
budgeted needs for 2001.
RESULTS OF OPERATIONS
REVENUES. In 2000, we recorded a royalty fee of $250,000, due from Two
Way TV, which we received in March 2001. We had no revenues from operations for
the years ended December 31, 1999 or 1998.
10
GENERAL AND ADMINISTRATIVE EXPENSES. The Company incurred general and
administrative expenses of $1.9 million for the year ended December 31, 2000,
which consisted primarily of $133,000 related to professional fees for
accounting and audit services, $110,000 of professional services related to
market research, PR and litigation support, $390,000 of professional advisory
fees and $246,000 related to proxy solicitation, SEC compliance, shareholder
relations and our annual meeting in 2000. Other operating expenses included
legal expense of $446,000 related to general corporate matters, including
litigation related to bankruptcy claims which we continue to dispute, and
$322,000 of payroll and related expenses. The increase of $556,000 from the $1.3
million for the year ended December 31, 1999 was primarily due to $390,000 of
professional advisory services not incurred in prior year, $84,000 increase over
prior year payroll expenses, and $71,000 of increases expense related to legal
fees related to litigation. General and administrative expenses were $192,000
more in the year ended December 31, 1999 than general and administrative
expenses for the year ended December 31, 1998, which was $1.1 million. This
increase was primarily due to increased legal fees in 1999.
OTHER INCOME AND EXPENSE
INTEREST INCOME. Our interest income for the year ended December 31,
2000, was approximately $407,000, which consisted primarily of interest earned
on proceeds from the settlement with the Settling Parties. The increase of
$137,000 from the $270,000 for the year ended December 31, 1999, was primarily
due to the interest received on the proceeds from the settlement. Interest
income for the year ended December 31, 199, 1998 was approximately $6,600. The
increase of $263,000 between 1998 and 1999 was primarily due to the interest
received on the proceeds from the settlement.
INTEREST EXPENSE. Our interest expense for the year ended December 31,
2000, 1998 and 1998 was approximately $548,000, $458,000 and $619,000,
respectively. The amounts for 1998 and 1997 represent interest accrued on the
12% Senior Secured Convertible Promissory Notes issued to the Settling Parties,
which were converted as part of the Settlement Agreement. This interest stopped
as of the consummation of the Settlement Agreement. Interest expense for 2000
and 1999 was related to interest accrued to unsecured creditors as part of our
bankruptcy reorganization.
OTHER INCOME. In 2000, we recorded no other income. In 1999, we
recorded other income of approximately $141,000, which consisted of checks
written to other unsecured creditors in our bankruptcy which were returned for
various reasons. After performing the actions and waiting for the amount of time
specified by our counsel, we redeposited these checks and accounted for these
funds as other income. We recorded no other income in 1998.
LITIGATION SETTLEMENT. No settlement was received in 2000. We did,
however, incur additional losses of $1.9 million in 2000 resulting from
increased claims by unsecured creditors which were approved by the Bankruptcy
Court. We received $10.4 million from the Settling Parties upon the consummation
of the Settlement Agreement during the year ended December 31, 1999, and
$502,000 in connection with the proceeds from other unrelated litigation during
the year ended December 31, 1998.
REORGANIZATION EXPENSES. We had reorganization expenses for the years
ended December 31, 2000, 1999 and 1998 of approximately $464,000, $865,000 and
$252,000, respectively. These expenses were directly related to our Chapter 11
bankruptcy reorganization, entered into as a condition to the consummation of
the Settlement Agreement, the litigation and other expenses incurred in
contesting claims in our bankruptcy reorganization, which is still ongoing.
11
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS:
PAGE
----
Interactive Network, Inc. - Independent Auditor's Report - Marc Lumer................... 13
Interactive Network, Inc. - Independent Auditors' Report - KPMG LLP..................... 14
Interactive Network, Inc. - Consolidated Balance Sheets................................. 15
Interactive Network, Inc. - Consolidated Statements of Operations....................... 16
Interactive Network, Inc. - Consolidated Statements of Changes in
Shareholders' Equity (Deficit)............................ 17
Interactive Network, Inc. - Consolidated Statements of Cash Flows....................... 18
Interactive Network, Inc. - Notes to Consolidated Financial Statements.................. 20
Two Way TV (US), Inc. - Independent Auditor's Report - Marc Lumer....................... 33
Two Way TV (US), Inc. - Consolidated Balance Sheets..................................... 34
Two Way TV (US), Inc. - Consolidated Statements of Operations........................... 35
Two Way TV (US), Inc. - Consolidated Statements of Changes in Shareholders'
Equity (Deficit)............................................. 36
Two Way TV (US), Inc. - Consolidated Statements of Cash Flows........................... 37
Two Way TV (US), Inc. - Notes to Consolidated Financial Statements...................... 38
12
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Interactive Network, Inc.:
I have audited the accompanying consolidated balance sheet of Interactive
Network, Inc. and subsidiary (the "Company") (as restated; see Note 15) as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. My responsibility is to report on these consolidated
financial statements based on the results of my audits.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audits provide a reasonable basis for my report.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2000 and December 31, 1999, and the results of its operations and
its cash flows of the years ended December 31, 2000 and December 31, 1999 in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2, the
Company entered into a settlement agreement with certain parties in litigation
(the "Settlement Agreement") whereby the Company entered into a reorganization
by filing a voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the Northern District
of California (the "Bankruptcy Court") on September 14, 1998. Substantially all
liabilities of the Company as of the date of this report are subject to
settlement under the plan of reorganization confirmed by the Bankruptcy Court on
April 23, 1999. The Company is currently operating under the confirmed plan of
reorganization under the jurisdiction of the Bankruptcy Court and continuation
of the Company as a going concern is contingent upon, among other things, the
ability to (1) develop an appropriate business plan and strategic direction for
the Company's planned future operations, including conservation of available
capital and working capital as the Company seeks to further develop and exploit
its patent portfolio, (2) confirm the availability of net operating tax losses
after reorganization, and (3) generate adequate sources of working capital and
other liquidity as necessary to meet future obligations. Management's plans in
regard to these matters are also described in Note 3. These contingencies and
the uncertainties inherent in the bankruptcy process raise substantial doubt
about the ability of the Company to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
/s/ Marc Lumer
--------------------
Marc Lumer & Company
San Francisco, California
April 13, 2001,
October 22, 2001
(As it relates to Note 15)
13
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Interactive Network, Inc.:
We have audited the accompanying consolidated statements of operations,
shareholders' deficit and cash flows of Interactive Network, Inc. and subsidiary
(the Company) for the year ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our report.
In our opinion, the consolidated financial statements of the Company referred to
above present fairly, in all material respects, the results of its operations
and its cash flows for the year ended December 31, 1998 in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2, the
Company entered into the Settlement Agreement whereby the Company commenced a
reorganization by filing a voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court for the
Northern District of California (the Bankruptcy Court) on September 14, 1998.
Substantially all liabilities of the Company, as of the date of this report, are
subject to settlement under a plan of reorganization to be confirmed by the
Bankruptcy Court. The Company is currently operating as debtor-in-possession
under the jurisdiction of the Bankruptcy Court and continuation of the Company
as a going concern is contingent upon, among other things, the ability to (1)
formulate an acceptable plan of reorganization that will be confirmed by the
Bankruptcy Court, and be able to fully implement that plan in compliance with
the Settlement Agreement, (2) settle the claims of unsecured creditors within
available cash resources as currently contemplated by management, (3) develop an
appropriate business plan and strategic direction for the Company's planned
future operations after reorganization including conservation of available
capital and working capital as the Company seeks to further develop and exploit
its patent portfolio, (4) confirm the availability of net operating tax losses
after reorganization, and (5) generate adequate sources of working capital and
other liquidity as necessary to meet future obligations. Management's plans in
regard to these matters are described in Note 2. These contingencies and the
uncertainties inherent in the bankruptcy process raise substantial doubt about
the ability of the Company to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
/s/ KPMG LLP
--------------------------
KPMG LLP
Mountain View, California
March 15, 1999,
14
INTERACTIVE NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
-------------- --------------
Assets
Current assets:
Restricted cash $ 5,609,735 $ 6,365,758
Cash 685,168 1,210,399
Royalty fee receivable 250,000 -
Prepaid expenses and other current assets 47,218 81,576
-------------- --------------
Total current assets 6,592,121 7,657,733
Deposits 3,220 220
-------------- --------------
Total assets $ 6,595,341 $ 7,657,953
============== ==============
Liabilities and Shareholders' (Deficit)
Current liabilities:
Accounts payable and accrued liabilities $ 443,952 $ 614,077
Accrued liabilities to officer - 3,600
Deferred legal fees - current portion 957,775 -
Promissory note - current portion 85,565 -
Liabilities subject to compromise 5,503,263 5,015,718
-------------- --------------
Total current liabilities 6,990,555 5,633,395
Deferred legal fees - net of current portion - 916,867
Promissory note - net of current portion 598,955 -
-------------- --------------
7,589,510 6,550,262
-------------- --------------
Commitments and Contingencies (Notes 7, 8 and 11)
Shareholders' equity (deficit):
Preferred stock, no par value, 10,000,000 shares
authorized; no shares issued and outstanding as of
December 31, 2000 and 1999 - -
Common stock, no par value, 150,000,000 shares
authorized; 43,019,277 and 38,855,030 shares issued and
outstanding as of December 31, 2000 and 1999, respectively 145,874,986 142,374,810
Accumulated deficit (146,869,155) (141,267,119)
-------------- --------------
Total shareholders' equity (deficit) (994,169) 1,107,691
-------------- --------------
Total liabilities and shareholders' equity (deficit) $ 6,595,341 $ 7,657,953
============== ==============
See accompanying notes to consolidated financial statements.
15
INTERACTIVE NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------- ------------- -------------
Royalty fees $ 250,000 $ - $ -
------------- ------------- -------------
General and administrative expenses 1,873,168 1,317,182 1,124,943
------------- ------------- -------------
Loss from operations (1,623,168) (1,317,182) (1,124,943)
Other (income) and expense
Interest income (406,738) (270,373) (6,618)
Interest expense (contractual interest exceeds
recorded interest expense by $4,453,297 in 1998) 547,913 458,000 618,821
Other (income) - (141,273) -
Net loss from investment in affiliate
accounted for by the equity method 1,170,857 - -
Allowance for investment in affiliate 329,143 - -
Litigation settlement 1,873,273 (10,375,380) (501,837)
------------- ------------- -------------
Other (income) and expense, net 3,514,448 (10,329,026) 110,366
------------- ------------- -------------
Income (loss) before reorganization expenses (5,137,616) 9,011,844 (1,235,309)
Reorganization expenses 464,420 864,928 252,220
------------- ------------- -------------
Net income (loss) $ (5,602,036) $ 8,146,916 $ (1,487,529)
============= ============= =============
Basic net income (loss) per share $ (0.14) $ 0.23 $ (0.05)
============= ============= =============
Fully diluted net income (loss) per share $ (0.14) $ 0.22 $ (0.05)
============= ============= =============
Shares used in basic per share calculation 40,048,468 35,515,617 30,840,441
============= ============= =============
Shares used in fully diluted per share calculation 40,048,468 37,574,827 30,840,441
============= ============= =============
See accompanying notes to consolidated financial statements.
16
INTERACTIVE NETWORK, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Common Stock
-------------------------------
Shares Amount Accumulated Total Shareholders'
deficit Equity (Deficit)
-------------- -------------- -------------- --------------
Balances as of December 31, 1997 30,840,441 $ 103,281,755 $(147,926,506) $ (44,644,751)
Net Loss (1,487,529) (1,487,529)
-------------- -------------- -------------- --------------
Balances as of December 31, 1998 30,840,441 103,281,755 (149,414,035) (46,132,280)
Net Income 8,146,916 8,146,916
Exercise of Stock Options 200,000 20,106 --- 20,106
Conversion of Notes Payable
into Common Stock 7,814,589 39,072,949 --- 39,072,949
-------------- -------------- -------------- --------------
Balances as of December 31, 1999 38,855,030 142,374,810 (141,267,119) 1,107,691
Net loss --- --- (5,602,036) (5,602,036)
Sale of Common Stock 2,600,913 3,350,837 --- 3,350,837
Cost of Stock Issuance --- (46,161) --- (46,161)
Exercise of Stock Options 1,563,334 195,500 --- 195,500
-------------- -------------- -------------- --------------
Balances as of December 31, 2000 43,019,277 $ 145,874,986 $(146,869,155) $ (994,169)
============== ============== ============== ==============
See accompanying notes to consolidated financial statements.
17
INTERACTIVE NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------- ------------- -------------
Cash flows from operating activities:
Net income (loss) $ (5,602,036) $ 8,146,916 $ (1,487,529)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Reorganization expenses 464,420 864,928 252,220
Loss from investment in affiliate 1,170,857 - -
Allowance for investment in affiliate 329,143 - -
Changes in operating assets and liabilities:
Royalty fee receivable (250,000) - -
Prepaid expenses and other assets 31,358 (3,540) (44,701)
Accounts payable (170,125) 614,077 -
Accrued liabilities to officer (3,600) 3,600 948,473
Accrued interest - - 619,210
Deferred legal fees and promissory note 261,008 - -
Liabilities subject to compromise 2,908,538 - -
------------- ------------- -------------
Net cash provided by (used in)
operating activities before reorganization items (860,437) 9,625,981 287,673
Professional fees paid for services rendered in connection
with Chapter 11 proceedings - - (37,399)
Payments to unsecured creditors (2,420,993) (2,370,531) -
------------- ------------- -------------
Net cash provided by (used in) operating activities (3,281,430) 7,255,450 250,274
------------- ------------- -------------
Cash flows provided by investing activities:
Investment in Two Way TV (US) (500,000) - -
Promissory note receivable from Two Way TV (US) (1,000,000) - -
------------- ------------- -------------
Net cash used in investing activities (1,500,000) - -
------------- ------------- -------------
Cash flows provided by financing activities:
Sale of common stock, net 3,304,676 - -
Exercise of stock options 195,500 20,106 -
------------- ------------- -------------
Net cash provided by financing activities 3,500,176 20,106 -
------------- ------------- -------------
Increase (decrease) in cash (1,281,254) 7,275,556 250,274
Cash at beginning of year 7,576,157 300,601 50,327
------------- ------------- -------------
Cash at end of year $ 6,294,903 $ 7,576,157 $ 300,601
============= ============= =============
Supplemental disclosure of cash flow information:
Income taxes paid $ 4,000 $ 800 $ 0
------------- ------------- -------------
Interest paid $ 214,889 $ 123,113 $ 0
------------- ------------- -------------
Non-Cash Items:
Conversion of current liabilities to liabilities
subject to compromise $ 0 $ 0 $ 46,296,316
------------- ------------- -------------
Conversion of notes payable into common stock $ 0 $ 39,072,949 $ -
------------- ------------- -------------
Reorganization expenses $ 0 $ 752,046 $ 214,821
------------- ------------- -------------
See accompanying notes to consolidated financial statements.
19
INTERACTIVE NETWORK, INC.
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(1) THE COMPANY
Interactive Network, Inc. (the "Company") was incorporated in
California on November 10, 1986, to engage in the design, development,
and marketing of a subscription-based interactive television
entertainment system. As discussed more fully below, the Company was
unable to continue operations due to the lack of additional financing
and curtailed operations in August 1995.
The Company currently does business only in the state of California and
is in good standing with the Secretary of State. Prior to 1995, the
Company was qualified to do intrastate business in four other states,
but ceased doing business outside California in 1995, and its
qualification to do business in those other states has been revoked or
surrendered. The Company filed delinquent income tax returns for the
years 1995-1998 and paid the corresponding state minimum taxes in 2000.
The Company has been in compliance with its Securities and Exchange
Commission ("SEC") filings since the filing of its Form 10-K for the
fiscal year ended December 31, 1998. The last quarterly financial
report filed by the Company with the SEC was its Form 10-Q for the
quarter ended September 30, 2000.
(2) REORGANIZATION AND BASIS OF REPORTING
In August of 1995, the Company commenced litigation (the "Litigation")
against certain shareholders and their affiliated entities (the
"Settling Parties"). The Litigation arose in relation to the use of the
Company's intellectual property as collateral for secured loans made to
the Company. See Note 12 for additional information.
On July 10, 1998, the Company and the defendants in the Litigation, the
Settling Parties, entered into an agreement (the "Settlement
Agreement") whereby the Company filed a petition under Chapter 11 of
the Bankruptcy Code in the U.S. Court for the Northern District of
California on September 14, 1998 (the "Petition Date"). Under the terms
of the Settlement Agreement, upon entry by the Bankruptcy Court of a
final non-appealable order confirming the Company's Plan of
Reorganization (the "Plan"), the Settlement Agreement was consummated
and the Company was paid $10 million (plus accrued interest thereon,
which approximates $375,380). Additionally, an amount of $2.5 million
was paid by the Settling Parties directly to the Company's attorneys in
respect of the Company's legal fees associated with the Litigation.
Security interests in the Company's assets were released and 7,814,589
shares of the Company's common stock were issued in conversion of
outstanding debt held by the Settling Parties in the amount of $39.1
million, of which $26.5 million represents the principal amount and
$12.6 million represents accrued interest, as of February 25, 1998
(when interest ceased to accrue under terms of the Settlement
Agreement). In addition, the Settlement Agreement includes releases of
the Settling Parties by the Company and releases of the Company by each
of the Settling Parties with respect to the litigation and any other
preexisting claims or contracts including the cancellation of
outstanding warrants.
20
The Company's Plan under Chapter 11 was filed on December 22, 1998, and
the First Amendment to the Plan was filed on February 18, 1999,
providing for payment in full to all of the Company's creditors on
their allowed claims. The final date for filing claims was January 19,
1999, at which time non-duplicative claims totaling approximately $13.7
million were filed or scheduled (not including the claims of the
Settling Parties). Under the Plan, the Company intends to pay in full
allowed claims, has paid $5.1 million in allowed claims, and believes
that (in addition to expenses of administration of approximately
$500,000) there are no more than approximately $5 million in allowed
claims (plus certain accrued interest), although the final figure is
subject to the claims objection and allowance procedures under Chapter
11. The Bankruptcy Court commenced a hearing on confirmation of the
Plan on February 18, 1999. The hearing was completed in March 1999, and
the Plan was confirmed on April 12, 1999.
The Company retained possession of its property throughout the
bankruptcy process and is authorized to operate and manage its
businesses and enter into all transactions (including, among other
items, paying employee wages, obtaining services, supplies and
inventories) that it could have entered into in the ordinary course of
business had there been no bankruptcy filing.
Liabilities subject to compromise presented in the accompanying
consolidated balance sheet represent the Company's estimate of
pre-petition liabilities allowed as of December 31, 2000, and 1999,
subject to adjustment in the reorganization process (see Note 7). Under
Chapter 11, actions to enforce certain claims against the Company are
stayed if the claims arose, or are based on events that occurred, on or
before the Petition Date. Other liabilities may arise or be subject to
compromise as a result of rejection of executory contracts and
unexpired leases or the Bankruptcy Court's resolution of claims for
contingencies and other disputed amounts. Although the Plan was
confirmed, the Company is still disputing the claims of certain
creditors, and such claims are considered Liabilities Subject to
Compromise herein. The Company has also settled with many of its
creditors and repaid those amounts in 2000 and 1999.
(3) GOING CONCERN
The accompanying consolidated financial statements have been presented
on the basis that the Company is a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the
normal course of business. As a result of the Chapter 11 filing and
circumstances relating to the filing, realization of assets and
satisfaction of liabilities is subject to uncertainty. Resolution of
disputed liabilities could materially change the amounts reported in
the accompanying consolidated financial statements, which do not give
effect to adjustments to the carrying values of assets and liabilities.
The ability of the Company to continue as a going concern is contingent
upon, among other things, the ability to (1) fully implement the
confirmed Plan in compliance with the Settlement Agreement (2) develop
an appropriate business plan and strategic direction for the Company's
planned future operations, including conservation of available capital
and working capital as the Company seeks to further develop and exploit
its patent portfolio, (3) confirm the availability of net operating tax
loss carryforwards after reorganization, (4) generate adequate sources
of working capital and other liquidity as necessary to meet future
obligations and (5) settle the claims of the unsecured creditors within
the available cash resources as currently contemplated by management.
The Company's business plan is to concentrate on further development
and exploitation of its patent portfolio through licenses, joint
ventures or other methods that will not involve substantial capital
requirements or large overhead expenses for the Company. The Company
does not intend to engage in the manufacture or sale of products
involving its patents, which would require investment in plant,
equipment or inventories, and believes that the cash it received under
the Settlement Agreement will, after paying its creditors under the
Plan, be inadequate to supply any necessary working capital during
fiscal 2001. Additional working capital will be necessary to meet the
contemplated cash needs. In the event that the Company completes its
acquisition of and merger with Two Way TV (US), the newly existing
company may develop, market and sell products relating to the Company's
patents. Additional working capital will be necessary to meet the
potential cash needs.
21
(4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLE OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned Nevada subsidiary
formed in 1994, RealTime Gaming Systems, Inc. This subsidiary
has no assets or liabilities and ceased to do business during
1995.
(b) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board's (FASB) Statement of
Financial Accounting Standards (SFAS) No. 107, DISCLOSURES
ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, defines the fair
values of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between
willing parties. At December 31, 2000 and 1999, the fair
values of the Company's cash, other current assets and other
accrued liabilities approximate their carrying values due to
their short maturity. As stated in Note 7, certain accounts
payable and accrued liabilities are included amongst
liabilities subject to compromise as of December 31, 2000 and
1999. Accordingly, the fair value of these items is not
readily determinable.
(c) USE OF ESTIMATES
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(d) CONCENTRATION OF RISK
The Company places its cash and temporary cash investments
with well-established financial institutions. At December 31,
2000 and 1999 and periodically throughout the years, such cash
balances were in excess of FDIC insurance limits.
(e) PER SHARE INFORMATION
Basic and diluted net income (loss) per share are computed
using the weighted-average number of outstanding shares of
common stock. Diluted net loss per share does not include the
effect of the following contingently issuable shares because
their effects are antidilutive.
December 31,
--------------------------------------------------------------------------------
2000 1999 1998
---------------------------- ----------------------- -------------------------
Weighted- Weighted- Weighted-
Number of Average Number of Average Number of Average
Shares Exercise Shares Exercise Shares Exercise
Price Price Price
------------ -------------- ----------- ---------- ----------- ------------
Stock Options Outstanding 3,437,500 $0.64 3,887,500 $0.54 1,350,000 $0.17
Shares issuable upon the 2,541,672 $1.90 234,753 $3.87 709,210 $5.96
exercise of warrants
------------ ----------- -----------
5,979,172 4,122,253 2,059,210
============ =========== ===========
22
Also, net loss per share for 1998 does not include the effect
of shares issued on the conversion of secured notes payable
because their effects were antidilutive. See Note 7.
(f) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period
that includes the enactment date. Where a deferred tax asset
has been recognized, a valuation allowance is established if,
based on available evidence, it is more likely than not that
the deferred tax asset will not be realized.
(g) STOCK OPTION PLAN
The Company has adopted SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, which permits entities to recognize
as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS
No. 123 also allows entities to continue to apply the
provisions of Accounting Principals Board (APB) Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and provide pro
forma net income disclosures for employee stock option grants
made as if the fair value based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
(h) RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION
Certain reclassifications have been made to the 1999 financial
statements to conform with the 2000 financial statement
presentation. Such reclassifications have had no effect on net
income or gross margin as previously reported.
(i) COMPREHENSIVE INCOME / LOSS
The Company has no significant components of other
comprehensive income or loss.
(j) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended by
SFAS No. 137 and No. 138 in June 1999 and June 2000,
respectively. These Statements establish accounting and
reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair
value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are
recognized in earnings in the period of change. The Company
must adopt SFAS No. 133 for fiscal years beginning after June
15, 2000. Management believes the adoption of SFAS No. 133
will not have a material effect on the consolidated financial
position or results of operations of the Company.
23
In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 98-5, REPORTING
ON COSTS OF START-UP ACTIVITIES, which provides guidance on
the financial reporting of start-up costs and organization
costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. Start-up
activities are defined broadly as those one-time activities
related to opening a new facility, introducing a new product
or service, conducting business in a new territory, conducting
business with a new class of customer or beneficiary,
initiating a new process in an existing facility, or
commencing some new operation. The SOP is effective for
financial statements for fiscal years beginning after December
15, 1998. The Company has determined that the adoption of the
SOP did not have an effect on its consolidated financial
statements.
(5) ROYALTY FEE RECEIVABLE
The Company entered into a worldwide license agreement that exclusively
licenses its intellectual property in countries other than the United
States and Canada to Two Way TV Ltd. in exchange for a royalty payment
of a certain percentage of Two Way TV Ltd.'s world wide sales. Under
the terms of the agreement, Two Way TV Ltd. will pay the Company a
royalty of 3% of worldwide Gross Profits, with a minimum annual royalty
of no less than $250,000 by January 31, 2001, with the minimum royalty
payment increasing by at least eight percent (8%) each year thereafter.
In March 2001, Two Way TV Ltd. paid the Company a royalty of $250,000
for the year ending December 31, 2000, which is reflected on the
accompanying financial statements as a royalty fee receivable.
(6) INVESTMENTS IN SIGNIFICANT AFFILIATE, AT EQUITY
The Company owns 50% of the outstanding capital stock of Two Way TV
(US), Inc. ("Two Way TV (US)"), a corporate joint venture between the
Company and Two Way TV Limited ("Two Way TV"). Two Way TV (US)'s
offices are located at 4929 Wilshire Boulevard - Suite 930, Los
Angeles, CA 90010. Two Way TV (US) operates in the United States and
Canada using technology licensed by the Company and Two Way TV. Both
the Company and Two Way TV made investments in the joint venture of
$500,000 each during 2000, and then each party loaned an additional
$1,000,000 during the year. Each shareholder reserves the right to
convert the loans to equity in Two Way TV (US) in the future at terms
to be determined and agreed upon at a later date by Interactive Network
and Two Way TV, who are Two Way TV (US)'s shareholders.
Condensed financial data of Two Way TV (US) for the period from
inception (January 10, 2000) ended December 31, 2000 follows:
SUMMARY OF OPERATIONS
Revenues -0-
Costs and expenses $ 2,212,011
Loss before income taxes (2,212,022)
Income taxes 800
Net loss (2,212,811)
Interactive Network's equity in net income (1,106,405)
BALANCE SHEET DATA ASSETS
Current assets 785,499
Non-current assets 436,835
-------------
Total assets $ 1,222,334
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities 2,053,496
Long-term debt -0-
Other non-current liabilities 356,087
Shareholders' deficit (1,187,249)
-------------
Total liabilities and shareholders' deficit $ 1,222,334
24
The Company periodically evaluates the recoverability of its equity investments,
in accordance with APB No. 18, "The Equity Method of Accounting for Investments
in Common Stock.", and if circumstances arise where a loss in value is
considered to be other than temporary, the Company will record a write-down of
investment cost. The Company's recoverability analysis is based on the projected
undiscounted cash flows of the operating ventures, which is the lowest level of
cash flow information available. During the year ended December 31, 200, the
Company recorded a write-off of approximately $406,376, which represented the
net balance of certain investments in and advances to Two Way TV (US), Inc.,
which were stated in excess of their net realizable value. The total charge was
classified in the statement of operations as "Net loss from investment in
affiliate accounted for by the equity method."
(7) LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise include substantially all of the
current and noncurrent liabilities of the Company as of the Petition
Date which are subject to settlement under the Plan. These liabilities
were transferred from their respective pre-petition balance sheet
accounts to liabilities subject to compromise. Certain pre-petition
liabilities have been approved by the Bankruptcy Court for payment and
to the extent not paid, are included in accrued expenses and other
payables as of December 31, 2000 and 1999. Liabilities subject to
compromise are summarized as follows:
2000 1999
----------- -----------
Secured notes and accrued interest $ 513,088 $ -
Accounts payable and accrued expenses 4,990,175 3,292,325
Accrued liabilities to shareholder - 1,723,393
----------- -----------
$ 5,503,263 $ 5,015,718
=========== ===========
At December 31, 2000, $5,609,735 of the Company's cash was in a reserve
account held for settlement of claims from creditors.
The Settlement Agreement was consummated upon entry by the Bankruptcy
Court of a final non-appealable order confirming the Plan. Upon
consummation, the secured note holders released their security
interests and accrued interest of approximately $39 million and the
Company issued them 7,814,589 shares of common stock as part of the
settlement. This represents a conversion of the aggregate principal and
interest at $5.00 per share.
25
At December 31, 1999, the accrued liabilities to shareholder consists
of amounts accrued in relation to claims filed by a current shareholder
and former officer of the Company (the "Shareholder"). Included in this
amount are certain claims for unpaid compensation, amounts due under a
deferred compensation-noncompetition agreement, and interest, as to
which the Company may contest the time of payment or seek to reduce the
amounts payable under the Chapter 11 proceedings. The deferred
compensation-noncompetition agreement was entered into between the
Company and the Shareholder in December 1994. Concurrently with the
execution of the deferred compensation-noncompetition agreement, a
contingent promissory note in the principal amount of $2,000,000 issued
by the Company to the Shareholder in December 1986 as consideration for
the sale of certain patent rights by the Shareholder to the Company was
canceled. Under the terms of this agreement the Company made a cash
payment of $150,000 in 1994 to the Shareholder. The Company also agreed
to make a cash payment of $55,000 and to cancel the Shareholder's
obligation to the Company under a promissory note in the principal
amount of $45,000 on January 1, 1996. In addition, commencing January
1, 1996, the Company agreed to pay the Shareholder $62,500 on each
January 1, April 1, July 1 and October 1 thereafter through October 1,
2002, provided that the Company's available cash was sufficient to
satisfy the Company's requirements during the following 90-day period
and that the Shareholder continued to comply with the terms of the
deferred compensation-noncompetition agreement. To date the Company has
made no payments, other than the initial $150,000 in 1994. In
consideration of and as a condition to such payments, the Shareholder
agreed that during the eight-year period ending on December 31, 2002,
he would not engage in or become associated with any person or entity
engaged in any activity in the United States or Canada that is
competitive with the business of the Company.
The Company had excluded certain amounts from the total claim of the
Shareholder in arriving at the amount included as an allowed claim as
of December 31, 1999. Amounts accrued under the deferred
compensation-noncompetition agreement as of December 31, 1999, reflect
the amounts due at that date under the agreement. The Shareholder claim
included an additional amount of $1 million for interest and penalties
on payments due under this agreement during the period January 1, 1999
to December 31, 2002, which had not been accrued as of December 31,
1999. The claim of the Shareholder was settled in 2000.
The Company will continue to negotiate with creditors to reconcile
claims filed with the Bankruptcy Court to the Company's financial
records. The additional liability arising from this reconciliation
process, if any, is not subject to reasonable estimation. As a result,
no provision has been recorded for these possible claims. The Company
will recognize the additional liability, if any, as the amounts become
subject to reasonable estimation. Additional bankruptcy claims and
pre-petition liabilities may arise from the rejection of executory
contracts and unexpired leases, resolution of contingent and
unliquidated claims and the settlement of disputed claims. Under the
Plan, the outcome of the claims review and objection process may
materially change the amounts and terms of pre-petition liabilities.
Consequently, the amounts included in the consolidated balance sheets
as liabilities subject to compromise may be subject to future
adjustment.
(8) DEFERRED LEGAL FEES AND PROMISSORY NOTE
The Company incurred legal expenses reflected on the accompanying
financial statements at December 31, 2000 and 1999 of $957,775 and
$916,867, respectively, prior to confirmation of the Company's
bankruptcy reorganization plan on April 22, 1999, which became payable
on April 22, 2000, subject to Bankruptcy Court approval and which
counsel intends to seek. The Company also incurred post-confirmation
legal expenses, principally in preparing and litigating objections to
claims filed in the bankruptcy proceeding and for general corporate
matters, on which a balance of $684,520 remains unpaid, as of December
31, 2000. The Company and counsel have executed a promissory note in
this amount, of which $85,565 is reflected as a current liability on
the accompanying financial statements at December 31, 2000. The Company
has entered into an agreement with its counsel for payment of these
expenses on the following terms: preconfirmation legal fees in the
amount of $957,775 is due and payable on September 30, 2001, with
interest accruing from October 15, 2000 and $684,520 payable in equal
26
monthly installments over two years, commencing October 15, 2001, with
interest accruing from October 15, 2000 at 1% per annum over Bank of
America's prime rate (10.5% at December 31, 2000). The Company also
issued to its counsel a warrant exercisable in whole or in part from
time to time for 5 years, to purchase sufficient shares of our common
stock to enable the warrant holder, by tender of the warrant in
satisfaction of such indebtedness (and any indebtedness incurred in
appealing Bankruptcy Court awards), to extinguish such indebtedness in
full. The warrant exercise price is $1.23 per share. In addition to the
foregoing legal expenses, through December 31, 2000, contingent legal
expenses in the amount of approximately $1.1 million have been incurred
by the Company in contesting claims in the Bankruptcy Court, which the
Company will be obligated to pay only out of savings realized from a
successful reversal or reduction on appeal of awards granted by the
Bankruptcy Court with respect to contested claims, or, if an appeal is
not pursued, through cancellation of the unscheduled contingent legal
expenses by exercise of a warrant containing substantially the same
terms as the warrant described above.
(9) REORGANIZATION EXPENSES
Reorganization expenses recorded in 2000 and 1999 consist of
professional fees paid or incurred for legal services related to the
Company's reorganization.
(10) INCOME TAXES
The Company filed federal and state income tax returns for the years
ended December 31, 1994 through 1998 and paid the corresponding state
minimum taxes in 2000. As of December 31, 2000, the Company had
approximately $115 million and $42 million of federal and California
net operating losses, respectively. The Company also had approximately
$633,000 of federal research and experimentation credit carryforwards,
respectively.
The Company has not determined whether the reorganization or lack of
proper filing of income tax returns from December 31, 1993 through
December 31, 1998 has caused the Company to forfeit its net operating
loss carryforwards.
Should the net operating losses and credits described above, be
available for use, such carryforwards may be restricted in the event of
an "ownership change," as defined in Section 382 of the Internal
Revenue Code. The Company did have such a change in July 1989, and
again in November 1991, subjecting $13.9 million of its net operating
loss carryforwards to an annual limitation not to exceed $1.6 million.
The Company has not determined whether an ownership change has occurred
after December 31, 1993. Further, Section 382 provides that in the
event the Company ceases its trade or business, its net operating
losses and credit carryforwards would be forfeited.
There are sufficient net operating loss carryforwards to offset any
taxable income in 2001.
(11) LEASES
The Company leases its office facility under a lease which expires July
31, 2002. The facility lease is an operating lease, and rent expense
for the years ending December 31, 2000 and 1999 was $20,165 and
$12,396, respectively.
Future minimum lease payments under the lease for years ending after
December 31, 2000 are $36,000 for 2001 and $21,000 for 2002.
27
(12) COMMON STOCK
The Company has reserved a total of 5,000,000 shares of common stock
for issuance under its 1999 Stock Option Plan (the "1999 Plan"). The
1999 Plan, adopted by the board of directors on February 26, 1999, and
by the shareholders on March 31, 1999, with the increase of shares
reserved under the 1999 Plan from 3,650,000 to 5,000,000 approved by
the shareholders on June 30, 2000, provides for the granting of
incentive stock options to employees (including officers) and
nonqualified stock options to employees, non-employee directors and
consultants, at prices not less than 100% and 85% of the fair market
value of the Company's common shares for incentive and nonqualified
stock options, respectively, at the grant date. Incentive and
nonqualified stock options may have terms of up to 10 years and vest
over periods determined by the Board of Directors. Options generally
vest ratably over a 3- or 4-year period unless as otherwise specified
by the Board of Directors. The 1999 plan has a term of 10 years.
1,962,500 options are available for grant under this plan as of
December 31, 2000.
The Company had reserved 5 million shares of common stock for issuance
under the 1988 Stock Option Plan (the "1988 Plan") under terms
substantially similar to the 1999 Plan. The 1988 Plan had a 10-year
term. This plan expired in September 1998, but some options granted
under that plan remain outstanding.
1988 Plan Options outstanding as of December 31, 2000, are as follows:
Number of Weighted-Average Number of
Outstanding Remaining Contractual Options
Exercise Price Options Life (in Years) Vested
-------------- ------- --------------- ------
$0.09 100,000 0.00 100,000
$0.21 900,000 2.50 900,000
--------- ---------
1,000,000 1,000,000
========= =========
On October 19, 2000, the Company issued Mr. Bruce Bauer 50,000 shares
of its common stock upon his exercise of his stock option for those
share for $4,500 at the exercise price.
On October 6, 2000, the Company issued Mr. John Bohrer, a former
director, 100,000 shares of its common stock upon his exercise of his
stock option for those shares for $9,000 at the exercise price.
Options exercisable under the 1988 Plan as of December 31, 2000, 1999
and 1998 were 1,000,000, 1,150,000 and 1,350,000, respectively, with
weighted-average exercise prices of $0.20, $0.18 and $0.17, per share,
respectively. The weighted-average grant date fair value of options
granted in 2000, 1999 and 1998 was $0.31, $0.20 and $0.31,
respectively. No options were granted under the 1988 Plan in 2000 or
1999 as the 1988 Plan expired in September 1998.
The Company has taken the position that the options granted to the
Shareholder in 1995 were not authorized under the 1988 Stock Option
Plan, as amended in 1995, because the number of options granted
exceeded the allowed maximum for a single grant in any one year. In
addition, the Company maintains that 2,456,398 options which were held
by the Shareholder expired in 1998 because they were not exercised
within the time allowed after the Shareholder ceased to be an employee
of the Company. In September 2000, the bankruptcy court held that the
Shareholder had the right to exercise options to purchase 900,000
shares of the Company's common stock at $0.09 per share. The Company
registered those shares and issued them to the Shareholder in December
2000.
28
The options activity under the 1999 Plan is summarized, as follows:
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ------- --------- -------
Outstanding at beginning of year 2,737,500 $ 0.75 - $ -
Granted 300,000 1.49 2,737,500 0.75
Canceled (300,000) 0.84 - -
---------- ------- --------- -------
Outstanding at end of year 2,437,500 0.82 2,737,500 0.75
========== ======= ========= =======
Options exercisable at year-end 2,437,500 2,537,500
Weighted average grant-date fair
value of options granted during the
year whose exercise price equaled
market price on date of grant $ 1.49 $ 0.43
Under the 1999 Plan, no options were granted during 2000 or 1999 whose
exercise price was greater or less than market price on the date of grant.
The following table summarizes information about stock options
outstanding at December 31, 2000 under the 1999 Plan:
Options Outstanding Options Exercisable
- ------------------------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
--------- ----------- ----------- --------- ----------- -------
$0.42 - 1.01 2,037,500 3.5 years $0.65 2,037,500 $0.65
$1.47 - 1.50 300,000 3.5 years 1.49 300,000 1.49
2.23 100,000 3.9 years 2.23 100,000 2.23
- ------------- ------------ ----------- --------- ----------- --------
$0.42- $2.23 2,437,500 3.5 years $0.82 2,437,500 $0.82
============= ============ =========== ========= =========== ========
The fair value of options granted under the 1999 Plan during the years
ended December 31, 2000, 1999 and 1998 is estimated on the date of
grant using the Black-Scholes model with the following assumptions: no
dividend yield, risk-free interest of 6.0%, and expected lives of 5
years. The volatility assumption for the options granted in 2000 was
139%, and 60% was used for options granted in 1999 and 1998.
The Company uses the intrinsic value-based method under APB Opinion No.
25, in accounting for its employee stock-based compensation plans and,
accordingly, no compensation cost has been recognized for stock options
granted to employees in the accompanying consolidated financial
statements. Had compensation cost for the Company's stock-based
compensation plans been determined consistent with the fair value
approach set forth in SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, the Company's net income (losses) for the years ended
December 31, 2000, 1999 and 1998, would have been:
29
Years Ended December 31,
----------------------------------------------
2000 1999 1998
------------- ------------- -------------
Net Income (loss) - as reported $ (5,602,036) $ 8,146,916 $ (1,487,529)
Net Income (loss) - pro forma $ (5,847,556) $ 6,991,552 $ (1,590,529)
Basic and diluted net loss per share - as reported $ (0.14) $ 0.23 $ (0.05)
Basic and diluted net loss per share - pro forma $ (0.15) $ 0.19 $ (0.05)
A shareholder holds warrants to purchase the Company's common stock
dependent upon meeting certain performance criteria in offering
television programming identifying the Company's interactive games. The
warrants specify that the shareholder can purchase approximately 25% of
the Company's common stock outstanding at the time of exercise in three
installments of 5%, 10%, and 10% after satisfying each of three
separate performance criteria. In 1994, the Board of Directors amended
the original warrant agreement to establish an exercise price for the
original warrants of either $8.50 per share or 75% of the then current
market price of common stock, and to grant to the shareholder an
additional warrant to purchase 200,000 shares of common stock at an
exercise price of $5.875. The 25% warrants contain certain antidilution
provisions and terms of four, five and six years commencing when the
performance criteria for the first warrant are satisfied. Accordingly,
if and when it becomes probable that this shareholder will satisfy any
of the three separate performance criteria, the Company will recognize
expenses relating to the respective differences between the warrant
exercise prices of the shares and their then fair market value. As of
December 31, 2000, none of these warrants have been exercised, and no
common stock has been issued in relation to these warrants. It is
expected these warrants will be canceled as part of the Settlement
Agreement.
Warrants for 234,753 shares of common stock with exercise prices
ranging from $2.86 to $4.80 per share were assumed under the plan of
reorganization. These warrants expired on March 30, 2000.
The Company issued to its counsel a warrant exercisable in whole or in
part from time to time for 5 years, to purchase sufficient shares of
our common stock to enable the warrant holder, by tender of the warrant
in satisfaction of certain indebtedness (and any indebtedness incurred
in appealing Bankruptcy Court awards), to extinguish such indebtedness
in full. The warrant exercise price is $1.23 per share.
As of December 31, 2000, the Company sold 2,541,672 units to private
investors pursuant to a Stock Purchase and Investment Agreement dates
as of September 13, 2000. Each unit consists of one share of our common
stock and a five-year warrant to purchase one share of our common stock
at an exercise price of $1.90 per share. The Company received $3.1
million for the sale of these units.
(13) LITIGATION
(a) As indicated in Note 2, in August 1995 the Company commenced
litigation against certain shareholders and their affiliated
entities (Settling Parties) alleging that the defendants had
attempted to acquire the Company's intellectual property by
obtaining liens thereon through secured loans, reneging on
commitments to make future loans and then seeking to foreclose on
the Company's intellectual property when the Company could not
sustain its business without additional funds. The defendants
counterclaimed to foreclose their liens. In July 1998, the
Settling Parties entered into the Settlement Agreement referred to
in Note 2, settling the litigation, which was consummated in April
1999.
30
(b) Prior to 1995, the Company was a party to various litigation
matters with NTN Communications, Inc. ("NTN") and related parties,
primarily involving the validity of the Company's basic patent,
the scope of each party's respective technologies and the
Company's right to offer its game "IN The Huddle." The Company
obtained judgment against NTN enforcing a prior settlement
agreement with NTN and in 1998 received payment of approximately
$500,000 from NTN. The Company is continuing to pursue litigation
in Canada against NTN's affiliate, Networks North, Inc. (formerly
NTN Communications Canada, Inc.) for infringement of its patent.
(c) In 1995, two securities class action complaints were filed against
the Company and certain of its officers and directors for alleged
violation of Federal securities laws in connection with various
public statements made by the Company and certain of its officers
and directors during the period from January 19, 1994 to March 31,
1995. The securities class action plaintiffs failed to file a
proof of claim in the Company's bankruptcy proceedings by January
19, 1999.
This claim was settled on September 1, 1999, with expenses limited
to the $500,000 deductible under the Company's liability
insurance. This amount was classified as liabilities subject to
compromise in 1998 and was paid in 1999 in full and final
settlement of the claim.
No litigation settlement was received in 2000. The Company did,
however, incur additional losses of $1.9 million in 2000 resulting
from increased claims by unsecured creditors which were approved
by the Bankruptcy Court. The Company received $10.4 million from
the Settling Parties upon the consummation of the Settlement
Agreement during the year ended December 31, 1999, and $502,000 in
connection with the proceeds from other unrelated litigation
during the year ended December 31, 1998.
(14) QUARTERLY FINANCIAL INFORMATION--UNAUDITED
A summary of quarterly information follows:
QUARTER ENDED: MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- -------------- ------------ ------------ ------------ ------------
2000
Total revenue..................... $ - $ - $ - $ -
Cost of revenue................... - - - -
Operating loss.................... (613,495) (281,665) (647,702) (330,305)
------------ ------------ ------------ ------------
Net loss.......................... (511,391) (3,845,879) (1,230,579) (14,187)
Net loss per share,
diluted and basic................. $ (0.01) $ (0.10) $ (0.02) $ (0.01)
------------ ------------ ------------ ------------
1999
Total revenue..................... $ - $ - $ - $ -
Cost of revenue................... - - - -
Operating loss.................... (405,487) (126,782) (276,357) (508,556)
------------ ------------ ------------ ------------
Net loss.......................... (1,036,693) 9,965,243 (454,100) (327,533)
Net loss per share,
basic........................... $ (0.03) $ 0.28 $ (0.01) $ (0.01)
fully diluted................... $ (0.03) $ 0.27 $ (0.01) $ (0.01)
31
(15) RESTATEMENT OF FINANCIAL STATEMENTS
The financial statements for the years ended December 31, 2000 and 1999 have
been restated as follows:
(a) BALANCE SHEET - Liabilities subject to compromise have been
reclassified as a current liability. The restricted cash which
secures their payment is classified as current asset.
(b) NOTES TO FINANCIAL STATEMENTS - The Financial Statements and Notes
were all updated to reflect the change of the name of the
significant subsidiary to Two Way TV (US) from TWIN Entertainment.
Note 6 has been amended to include the condensed financial data of
Two Way TV (US) for the period from inception (January 10, 2000)
ended December 31, 2000 as required by Regulation S-X Rule 1-02
(w).
32
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
TWIN Entertainment, Inc.:
I have audited the accompanying balance sheet of TWIN Entertainment, Inc., a
development stage company (the "Company") as of December 31, 2000, and the
related statements of operations, shareholders' equity (deficit), and cash flows
for the period from inception (January 10, 2000) through December 31, 2000.
These financial statements are the responsibility of the Company's management.
My responsibility is to report on these financial statements based on the
results of my audit.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audits provide a reasonable basis for my report.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31,
2000, and the results of its operations and its cash flows for the period from
inception (January 10, 2000) through December 31, 2000, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company is
wholly dependent upon its two shareholders for operating capital, and
continuation of the Company as a going concern is contingent upon, among other
things, the ability to (1) develop an appropriate business plan and strategic
direction for the Company's planned future operations, including conservation of
available capital and working capital as the Company seeks to further develop
and exploit its market, (2) assume certain of the net operating tax loss
carry-forwards after its proposed merger with Interactive Network, and
(3)generate adequate sources of working capital and other liquidity as necessary
to meet future obligations. Management's plans in regard to these matters are
also described in Note 2. These contingencies raise substantial doubt about the
ability of the Company to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.
Based on the dependency as stated above, these financial statements should be
read in conjunction with the financial statements of its shareholders described
in Note 1.
/s/ Marc Lumer & Company
San Francisco, California
August 29, 2001
33
TWIN ENTERTAINMENT, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 2000
ASSETS
Current assets:
Cash $ 783,182
Prepaid expenses and other current assets 2,317
------------
Total current assets 785,499
Property and equipment net of
accumulated depreciation 425,335
Deposits and other assets 11,500
------------
Total assets $ 1,222,334
============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 53,496
Notes payable to shareholders 2,000,000
------------
Total current liabilities 2,053,496
Amount due to shareholders 356,087
Commitments and contingencies
0
------------
2,409,583
Shareholders' deficit:
Preferred stock, par value $.001, 20,000,000 shares
authorized; no shares issued and outstanding 0
Common stock, par value $.001, 50,000,000 shares
authorized; 20,000,000 shares issued and 20,000
outstanding
Additional paid-in-capital 980,000
Accumulated deficit (2,187,249)
------------
Total shareholders' deficit (1,187,249)
Total liabilities and shareholders' deficit $ 1,222,334
============
See accompanying notes to financial statements.
34
TWIN ENTERTAINMENT, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (JANUARY 10, 2000) ENDED DECEMBER 31, 2000
Revenue $ 0
-------------
General and administrative expenses 2,212,011
-------------
Loss from operations (2,212,011)
Other income
Interest income 24,520
Other income 1,042
-------------
Other income 25,562
-------------
Net loss before taxes on income (2,186,449)
Taxes on income (800)
-------------
NET LOSS $ (2,187,249)
=============
Basic net loss per share $ (0.11)
=============
Fully diluted net loss per share (0.11)
=============
Shares used in basic per share calculation 20,000,000
=============
Shares used in fully diluted per share calculation 20,000,000
=============
See accompanying notes to financial statements.
35
TWIN ENTERTAINMENT, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (JANUARY 10, 2000) ENDED DECEMBER 31, 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net (loss) to net cash $(2,187,249)
Provided by (used in) operating activities:
Depreciation 23,036
Changes in operating assets and facilities
Prepaid expenses and other assets (13,817)
Accounts payable 53,496
Amount due to shareholders 356,087
------------
Net cash used in operating activities (1,768,447)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of equipment (448,371)
------------
Net cash used in investing activities (448,371)
CASH FLOWS USED IN FINANCING ACTIVITIES:
Sale of common stock, net 1,000,000
Notes payable to shareholders 2,000,000
------------
Net cash provided by financing activities 3,000,000
Increase in cash 783,182
Cash at beginning of period 0
------------
Cash at end of period $ 783,182
Supplemental disclosure of cash flow information:
Income taxes paid (Note 1) $ 800
------------
Interest paid $ 0
See accompanying notes to financial statements.
36
TWIN ENTERTAINMENT, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (JANUARY 10, 2000) ENDED DECEMBER 31, 2000
Common Stock
-----------------------------
Paid-In Accumulated Total Shareholders'
Shares Amount Capital deficit Equity (Deficit)
------------- ------------- ------------- -------------
Balances at inception 0 $ 0 $ 0 $ 0
(January 10, 2000)
Sale of common stock 5,000,000 5,000 995,000 1,000,000
Stock split 15,000,000 15,000 (15,000) 0
Net loss (2,187,249) (2,187,249)
------------- ------------- ------------- -------------
Balances as of December 31, 2000 20,000,000 $ 20,000,000 $ 980,000 $ (2,187,249) $ (1,187,249)
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
37
TWIN ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements
From Inception (January 10, 2000) to December 31, 2000
NOTE 1 THE COMPANY (DEVELOPMENT STAGE)
TWIN Entertainment, Inc. (the "Company") was incorporated in Delaware on January
10, 2000, to enter into a joint venture license agreement with its two equal
shareholders:
a) Interactive Network, Inc., a California corporation
b) Two Way TV Limited, a corporation organized under the laws of
England and Wales
The Company's activities principally have been planning and participating in
building the plan to develop, market and supply digital (as well as analog)
interactive and related services, products and technology. The Company has a
non-exclusive right to the use of patents and other intellectual property of
Interactive Network, Inc. for the United States and Canada. Since its inception
the Company has relied on the issuance of stock and the borrowing of funds from
its joint venture owners, rather than recurring revenue for its sources of cash
flow.
The Company incurred losses through December 31, 2000 of $2,187,249. The Company
expects to continue to incur operating losses and generate negative cash flow
from operations through December 31, 2001. The Company's ability to eliminate
operating losses and to generate positive cash flow from operations in the
future depend upon a variety of factors (as discussed in Note 2), some of which
it is unable to control.
The Company currently does business only in the state of California and is in
good standing with the California Secretary of State.
NOTE 2 GOING CONCERN
The accompanying financial statements have been presented on the basis that the
Company is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
not had any operating revenue to date, and relies on its two shareholders for
its working capital. The ability of the Company to continue as a going concern
is contingent upon, among other things, the ability to (1) develop an
appropriate business plan and strategic direction for the Company's planned
future operations, including conservation of available capital and working
capital as the Company seeks to further develop and exploit its patent portfolio
under the licensing agreement, as discussed in Note 1; (2) assume certain of the
net operating tax loss carry-forwards after its proposed merger with Interactive
Network, Inc., and (3) generate adequate sources of working capital and other
liquidity as necessary to meet future obligations.
The Company's business plan is to develop and market Interactive Network's
significant patent portfolio and Two Way TV Limited's content, production
systems, operating platform and patents for digital interactive services.
The Company does not intend to engage in the manufacture or sale of products
involving its licensing rights, which would require investment in plant,
equipment or inventories, and believes that the current cash balances are
inadequate to supply working capital during the remainder of fiscal 2001. From
January 10, 2000 through August 31, 2001, the Company had borrowed $3,200,000
from its shareholders which was converted into 6,800,000 shares of common stock
on September 10, 2001. See Note 6.
38
In the event that the Company completes its merger with Interactive Network,
Inc., as described in Note 11, the newly existing company may develop, market
and sell products relating to the Company's patents. Additional working capital
will be necessary to meet the potential cash needs.
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board's (FASB) Statement of Financial
Accounting Standards (SFAS) No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS, defines the fair values of a financial instrument as the amount at
which the instrument could be exchanged in a current transaction between willing
parties. At December 31, 2000, the fair values of the Company's cash, other
current assets and accounts payable approximated their carrying values due to
their short maturity. As stated in Note 5, certain advances from related parties
and notes payable to shareholders may not be paid in the ordinary course of
business. Accordingly, the fair value of these items is not readily
determinable.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CONCENTRATION OF RISK
The Company places its cash and temporary cash investments with well-established
financial institutions. At December 31, 2000, and periodically throughout the
year, such cash balances were in excess of FDIC insurance limits.
PER SHARE INFORMATION
Basic and diluted net income (loss) per share are computed using the
weighted-average number of outstanding shares of common stock.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry-forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Where a deferred tax asset has been recognized, a valuation allowance is
established if, based on available evidence, it is more likely than not that the
deferred tax asset will not be realized.
STOCK OPTION PLAN
The Company indicated in a number of offer letters to employees during 2000 that
options to purchase an aggregate amount of 262,000 (pre-split) shares of the
Company's common stock could be granted in the future, subject in each case to
the adoption by the Company of a stock option plan and the approval by the
Company's board of directors of each of the option grants and related vesting
schedules. The Company has not adopted a stock option plan, and the board has
not approved any stock option grants. Accordingly, the Company and its board of
directors are of the opinion that no stock options have been granted or are
outstanding.
39
COMPREHENSIVE INCOME/LOSS
Company has no significant components of other comprehensive income or loss.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, as amended by SFAS No. 137 and No. 138 in
June 1999 and June 2000, respectively. These Statements established accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. For a derivative not
designated as a hedging instrument, changes in the fair value of the derivative
are recognized in earnings in the period of change. The Company must adopt SFAS
No. 133 for fiscal years beginning after June 15, 2000. Management believes the
adoption of SFAS No. 133 will not have a material effect on the consolidated
financial position or results of operations of the Company.
NOTE 4 PROPERTY AND EQUIPMENT
As of December 31, 2000, property and equipment consisted of the following:
Computer equipment system $ 222,485
Trade show booth 130,000
Software 34,103
Leasehold improvements 8,774
Equipment 46,889
Furniture and fixtures 6,120
-----------
488,371
Less accumulated depreciation and
amortization (23,036)
-----------
Property and equipment (net) $ 425,335
===========
Depreciation expense for the period from January 10, 2000 (inception) through
December 31, 2000 was $23,036.
NOTE 5 INVESTMENTS AND NOTES PAYABLE SHAREHOLDERS
The Company is owned equally under a corporate joint venture between Interactive
Network, Inc. ("Interactive") and Two Way TV Limited ("Two Way TV"). The Company
operates in the United States and Canada using technology licensed to it by
Interactive and Two Way TV Limited. Both Interactive and Two Way TV Limited made
investments in the joint venture of $500,000 each during 2000, and then each
party loaned an additional $1,000,000 during the year. The notes do not contain
a provision for interest because they are not anticipated to be paid off in the
normal course of business. As discussed in Note 6, each shareholder reserves the
right to convert the loans to equity in the Company in the future at terms to be
determined and agreed upon at a later date by Interactive Network and Two Way TV
Limited, who are the Company's shareholders. The notes were converted into
6,800,000 shares of the Company's common stock on September 10, 2001.
40
NOTE 6 LIABILITIES NOT PAYABLE IN THE ORDINARY COURSE OF BUSINESS
Subject to a pending agreement between the Company's shareholders, $2,000,000 of
the current liabilities of the Company as of December 31, 2000 are subject to
conversion to common stock. These liabilities were incurred by the shareholders
with the intent to convert if an agreement could be reached. Accordingly, the
Company has not accrued any interest payable.
Amounts due to shareholder (Two Way TV Limited) are subject to repayment in
accordance with the Memorandum of Terms for Two Way/IN Transaction dated
February 6, 2001 under which the parties agree to "prioritize" (subordinate) the
repayment of the debt upon the Company receiving funding of at least $3,000,000.
Management does not believe that the funding will be received within one year of
the balance sheet date.
NOTE 7 INCOME TAXES
The Company filed federal and state income tax returns and paid the
corresponding minimum taxes in 2000. As of December 31, 2000, the Company had
approximately $2.1 million of federal net operating losses.
The Company has not determined whether the proposed acquisition will cause the
Company to forfeit its net operating loss carry-forwards.
There are sufficient net operating loss carry-forwards to offset any foreseeable
taxable income in 2001.
Minimum income and franchise taxes for the State of Delaware were due with
payment on March 31, 2001. The returns were filed and the fees and taxes paid.
No provision was made at December 31, 2000.
NOTE 8 LEASES
The Company leases two offices, one in Los Angeles California, and the other in
San Francisco, California. Its San Francisco office facility operates under a
lease, which expired May 1, 2001. The facility lease is an operating lease, and
rent expense for the year ending December 31, 2000 was $46,000.
Future minimum lease payments under the lease for years ending after December
31, 2000 are $46,000 for 2001. The lease was extended on a month-to-month basis
after May 1, 2001.
The Los Angeles lease is month-to-month. Rent expense for 2000 was $19,269.
NOTE 9 COMMON STOCK
The Company has not reserved any shares of common stock at December 31, 2000.
See Note 3 above and Note 10 below regarding certain option matters.
NOTE 10 CONTINGENCIES AND COMMITMENTS
In connection with the termination of employment of its Chief Technology
Officer, the Company stated to the officer in a letter dated June 27, 2001 from
its President, Robert Regan, that 57.20% of the stock options provided for in
his employment agreement (or 200,200 shares) would have vested as of his
termination, if the Company had in fact adopted a stock option plan. Mr. Regan's
letter further noted that the Company has in fact never adopted a stock option
plan, and stated that Mr. Regan would therefore discuss the matter with the two
shareholders of the Company, Interactive and Two Way TV, and advise the employee
accordingly. The Company and its board of directors are of the opinion that no
stock options have been granted to the employee, and that he is not legally
entitled to any stock options.
41
NOTE 11 SUBSEQUENT EVENTS
In February 2001 the Company closed its office in Los Angeles and consolidated
its operations in San Francisco. As part of the consolidation, the Company
placed some of its equipment in storage. Under the provisions of SFAS 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF, the Company has identified assets for which the expected future
cash flow is zero. Accordingly the Company will take a pre-tax non-cash loss of
approximately $70,000 in 2001.
On May 31, 2001, the Company entered into a definitive Agreement and Plan of
Reorganization among Interactive, Two Way TV and the Company. At the effective
time, Interactive will merge into the Company, all of the outstanding shares of
Interactive will be converted into shares of common stock of the Company and
Interactive will cease to exist as a separate entity. The merger has been
approved by the boards of directors of both Interactive and the Company and is
subject to the approval of the shareholders of both companies.
42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents have been filed as a part of this
Amendment No. 1 to Form 10-K.
(1) Financial Statements:
Reference is made to the Index to Financial Statements under
Item 8 in Part II of this Amendment No. 1 to Form 10-K.
(2) Financial Statement Schedules:
All schedules have been omitted since they are not required or
are not applicable or the required information is shown in the
financial statements and related notes.
(3) Exhibits:
The exhibits listed below are required by Item 601 of
Regulation S-K. Each management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Amendment No. 1 to Form 10-K has been
identified.
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
3.1 Amended and Restated Articles of Incorporation of the
Registrant (incorporated by reference to Exhibit 4.1 of
Exhibits to Registrant's Form S-8 Registration Statement, as
filed with the Commission on November 10, 1992)
3.2 Certificate of Determination of the Registrant, filed with the
California Secretary of State on September 20, 1994
(incorporated by reference to Exhibit 3.3 of Exhibits to
Registrant's Form 8-K Report, as filed with the Commission on
October 3, 1994)
3.3 Certificate of Amendment of Amended and Restated Articles of
Incorporation of Registrant, dated May 22, 1995 (incorporated
by reference to Exhibit 3.3 of Exhibits to Registrant's Form
10-K Annual Report, as filed with the Commission on March 30,
1999)
3.4(a) Bylaws of the Registrant, as amended (incorporated by reference
to Exhibit 4.2 of Exhibits to Registrant's Form S-1
Registration Statement, as filed with the Commission on
November 10, 1992)
43
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
3.4(b) Amendment to Bylaws of the Registrant, dated February 26, 1999
(incorporated by reference to Exhibit 3.4(b) of Exhibits to
Registrant's Form 10-K Annual Report, as filed with the
Commission on March 30, 1999)
4.1 Specimen Common Stock Certificate of the Registrant
(incorporated by reference to Exhibit 4.1 of Exhibits to
Registrant's Form S-1 Registration Statement (No. 33-58780),
filed with the Commission on February 25, 1993)
9.1 Voting Trust Agreement, included in Settlement Agreement
attached as an Exhibit to the Plan of Reorganization, filed by
Registrant in the United States Bankruptcy Court for the
Northern District of California (incorporated by reference to
Exhibit 1.1 of Exhibits to Registrant's Form 8-K, as filed with
the Commission on April 29, 1999)
*10.1 Sale of Patent Agreement, between the Registrant and David B.
Lockton, dated November 18, 1986, and amendments thereto, dated
December 21, 1987 and July 30, 1990
*10.5 Settlement Agreement and Covenant Not to Sue, between the
Registrant and NTN Communications, Inc., dated April 1987, and
attached Patent License Agreement (Exhibit 10.17 of
Registration Statement)
*10.6(a) Employment Agreement, between the Registrant and David B.
Lockton, dated January 1, 1991 (incorporated herein by
reference to Exhibit 10.22 of Registration Statement)
10.6(b) Rider to Employment Agreement, between the Registrant and David
B. Lockton, dated December 10, 1994 (incorporated by reference
to Exhibit 10.54 to the Annual Report of the Registrant on Form
10-K for the year ended December 31, 1994)
10.7 Deferred Compensation and Non-Competition Agreement, between
the Registrant and David B. Lockton, dated December 10, 1994
(incorporated by reference to Exhibit 10.53 of Exhibit B to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994)
10.8 1999 Stock Option Plan (incorporated by reference to Exhibit A
to the Proxy Statement for the Special Meeting of Shareholders
of Registrant held on March 31, 1999 -- filed with the
Commission on March 15, 1999)
10.9 Form of Stock Option Agreement for use with the 1999 Stock
Option Plan (incorporated by reference to Exhibit 10.9 of
Exhibits to Registrant's Form 10-K Annual Report, as filed with
the Commission on March 30, 1999)
*10.10 Form of Indemnification Agreement (Exhibit 10.31 of Form S-1
Registration Statement)
44
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
10.11 Termination and License Agreement, dated January 31, 2000,
between the Registrant and Two Way TV Limited, a corporation
organized under the laws of England and Wales (incorporated by
reference to Exhibit 2.5 of Form 8-K, as filed with the
Commission dated February 11, 2000).
10.12 Joint Venture and Stock Purchase Agreement, dated December 6,
1999, between the Registrant and Two Way TV Ltd., a corporation
organized under the laws of England and Wales (incorporated by
reference to Exhibit 2.1 of Form 8-K, as filed with the
Commission dated February 11, 2000).
10.13 Joint Venture License Agreement, dated January 31, 2000,
between the Registrant, Two Way TV Limited, a corporation
organized under the laws of England and Wales, and TWIN
Entertainment Inc., a Delaware corporation (incorporated by
reference to Exhibit 2.2 of Form 8-K, as filed with the
Commission dated February 11, 2000).
10.14(a) Stock Purchase Agreement, dated December 2, 1992, among the
Registrant, Gannett Co., Inc. and David B. Lockton
(incorporated by reference to Exhibit 28.4 of Exhibits to
Registrant's Form 8-K Report, as filed with the Commission on
December 17, 1992)
10.14(b) Waiver and Amendment of Stock Purchase Agreement, with Gannett
Co., Inc., dated September 22, 1994 (incorporated by reference
to Exhibit 10.12(b) of Exhibits to Registrant's Form 10-K
Annual Report, as filed with the Commission on March 30, 1999)
10.15 Employment Agreement between the Registrant and Bruce Bauer,
dated April 13, 2000 (incorporated by reference to Exhibit
10.13 of Exhibits to Registrant's Form 10-K Annual Report,
filed with the Commission on April 14, 2000)
10.16 Employment Agreement between the Registrant and Dr. Robert
Brown, dated April 13, 2000 (incorporated by reference to
Exhibit 10.14 of Exhibits to Registrant's Form 10-K Annual
Report, filed with the Commission on April 14, 2000)
10.17 Addendum to Consulting Agreement for Gregg Freishtat
(incorporated by reference to Exhibit 10.15 of Exhibits to
Registrant's Form 10-K Annual Report, filed with the Commission
on April 14, 2000)
10.18 Addendum to Consulting Agreement for Eduard Mayer (incorporated
by reference to Exhibit 10.16 of Exhibits to Registrant's Form
10-K Annual Report, filed with the Commission on April 14,
2000)
10.19 Stock Purchase and Investment Agreement dated September 13,
2000 (incorporated by reference to Exhibit 10.19 of Exhibits to
Registrant's Form 10-Q Quarterly Report, filed with the
Commission on November 14, 2000)
45
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
10.20 Form of 10% Convertible Promissory Note (incorporated by
reference to Exhibit 10.20 of Exhibits to Registrant's Form
10-Q Quarterly Report, filed with the Commission on August 14,
2001)
10.21 Form of Common Stock Purchase Warrant (incorporated by
reference to Exhibit 10.21 of Exhibits to Registrant's Form
10-Q Quarterly Report, filed with the Commission on August 14,
2001)
21 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors - KPMG LLP
23.2 Consent of Independent Auditors - Marc Lumer & Company
23.3 Consent of Independent Auditors - Marc Lumer & Company
- ---------------------
* Incorporated by reference to the Exhibits of corresponding number
(unless otherwise noted) to Registrant's Form S-1 Registration
Statement (No. 33-42951) filed with the Commission on September
24, 1991, as amended.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERACTIVE NETWORK, INC.
By: /s/ Bruce W. Bauer
------------------------------------------
Bruce W. Bauer
Chairman of the Board, Chief Executive
Officer, President and
Chief Financial Officer
(Principal Executive Officer and Principal
Financial Officer)
Date: December 5, 2001
47